Everybody longs for a blissful retirement after working hard for decades.
Investing your money in stocks is an effective way of achieving the dream retirement you seek.
Not just any stocks, though.
We are talking about those that pay out steady and consistent dividends.
These dividends will form the bedrock of your stream of passive income as you enjoy your golden years.
The key to building and growing these dividends is in one magical word – compounding.
Read on to find out how compounding your money in dividend stocks can help you secure a comfortable retirement.
Building your portfolio’s foundation
As you embark on your journey as an income investor, you may be wondering how to go about building a dividends portfolio.
First off, ensure that you set aside at least six months of expenses as an emergency fund.
This money should help to tide over any emergencies and should not be used for investments.
Second, money that you need to use for big-ticket items in the next five years should also not be invested in stocks.
Some examples could be buying a house, using the money for a wedding, buying a car, or planning for a child.
Once you have set aside this sum of money, any excess can be used as your opportunity fund, which represents the money you can use to purchase dividend stocks.
You can start by purchasing stocks to form the initial foundation of your portfolio and then slowly grow the portfolio over time by adding more capital.
Selecting the right stocks
Your next question might be – which stocks should I purchase for my portfolio?
We are glad you asked.
Selecting the right stocks is important because you want to own these stocks over years, if not decades, to help you generate rising dividends that can form your passive income source and help you beat inflation.
Blue-chip stocks are a good starting base for your dividend-paying portfolio.
The local banks DBS Group (SGX: D05) and OCBC Ltd (SGX: O39) pay out reliable dividends and boast a long track record of operating through good times and bad.
Stock exchange operator Singapore Exchange Limited (SGX: S68), or SGX, is another stalwart that has paid out quarterly dividends for many years.
DBS Group recently upped its quarterly dividend from S$0.36 to S$0.48 for its third quarter of 2023 while OCBC increased its 2023 interim dividend from S0.28 to S$0.40.
SGX recently increased its quarterly dividend from S$0.08 to S$0.085 on the back of a strong set of earnings for fiscal 2023.
The REIT sector is another reliable asset class where you can source for dividend-paying stocks.
Well-managed REITs such as Mapletree Logistics Trust (SGX: M44U) and Parkway Life REIT (SGX: C2PU) have doled out distributions over many years.
Even though 2023 was a tough year for REITs, both REITs still managed to grow their distributions on a year-on-year basis.
Reinvesting your dividends
Once you have picked several dividend-paying stocks to start your portfolio, you can regularly allocate more capital to purchase more stocks over time.
As time passes, not only will your portfolio of stocks grow, but so will the dividends you receive.
It may start as just a trickle, but as you invest more money into dividend-paying REITs and blue-chip stocks, it will eventually turn into a gush.
What’s more, with the dividends you receive, you can reinvest them by purchasing even more shares and units of blue-chip stocks and REITs.
Compounding works its magic
This process of reinvesting your dividends is known as “compounding”.
Compounding may be a slow and steady process but it is a powerful one.
Over time, as you allocate more money to dividend-paying stocks and reinvest these dividends to buy even more stocks, you help to compound your portfolio into a robust one that can help you sail through your retirement.
Not only will the value of your portfolio grow along with the business growth of the stocks within it, but your flow of dividend income will also increase by leaps and bounds.
Get Smart: Time is your friend
The main prerequisite for compounding to work is – time.
You need patience to achieve effective compounding and need to exercise discipline in repeating the same process over years or even decades.
The rewards are well worth the wait.
If you can consistently compound your dividends into solid, growing stocks, you will end up with a portfolio you can not only be proud of but can also deliver healthy passive income for your retirement years.
We’ve discovered 5 SGX stocks that not only offer better returns than fixed deposits but also have the potential to beat inflation. Plus, these stocks provide capital growth and can significantly compound your wealth in the long term. If you’re looking to make your money work harder for you, download our FREE report for details on these five stocks.
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Disclosure: Royston Yang owns shares of DBS Group and Singapore Exchange Limited.
